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Bargain hunters browsing China's Internet seemed to have found a new favorite lately.
Youku,
YOKU 1.132686084142395%Youku Tudou Inc. ADSU.S.: NYSEUSD12.5
0.141.132686084142395%
/Date(1427835793131-0500)/
Volume (Delayed 15m)
:
3062206AFTER HOURSUSD12.3932
-0.1068-0.8544%
Volume (Delayed 15m)
:
215
P/E Ratio
N/AMarket Cap
2389573978.99832
Dividend Yield
N/ARev. per Employee
317664More quote details and news »YOKUinYour ValueYour ChangeShort position
an online video portal that has been hailed as the YouTube of China, made its New York debut in December 2010 and has already filled its short history with much drama. The Beijing company's American depositary shares (ticker: YOKU) swiftly doubled in early 2011, only to lose three-quarters of their value just as swiftly. Shares rebounded early this year but have since corrected more than 40%.

It's easy to see why Youku has tickled our fancy. Earth's most populous nation is going online. If the U.S. is a preview, Chinese kids won't be tuning in to anything as conventional as televisions. Youku already has more than 100 million unique visitors, and the throng is only swelling. Besides user-generated content, it also has a licensed professional library of more than 2,700 movies, 2,111 television series, and more than 610 variety shows. It's attracting investors as well as viewers, and a quarter of its $2.2 billion market cap is cash.

But for all its promise, Youku remains a stock to, well, watch rather than own. For a start, the company isn't yet profitable—and may not turn a profit until 2013. Revenue last quarter rose 96% year over year to 387 million yuan ($61 million), but a 96% jump in operating expenses led to a widening loss.

This week, shareholders will vote on a plan to buy chief rival Tudou Holdings in an $864 million stock deal that could spawn China's biggest online-video company in terms of advertising revenue. "Merger approval is not a problem," notes Macquarie analyst Jiong Shao. "However, the integration of the two companies remains a key challenge." Youku spends money procuring content and bandwidth, and paying commissions to ad agencies that bring in customers, so removing a big competitor could help lower costs in the long run. But merging two big sales forces can prove messy.

EVEN IN CHINA, ONLINE VIDEO isn't immune to restrained ad spending. Youku's stable of advertising customers grew at a 20% pace over the past two years but increased just 13% last quarter from the first quarter. Consumer-goods companies, a key bloc that accounts for more than half of revenue, are still flocking to Youku, but auto and finance advertisers are pulling back, notes HSBC analyst Chi Tsang. HSBC expects Youku to end 2012 with 303 customers, down from 348 previously forecast.

Another tense sign: Advertising customers are dragging their feet with payments. The time it took Youku to collect accounts receivable recently lengthened to 132 days, from 109 a year ago, and Youku can't breathe easy until its customers do. Beijing remains another wild card. Recent rules banning ads during certain prime-time shows have helped Youku by steering some advertisers toward its online platform. But rules regulating online entertainment and even the use of ads are still evolving—and bear close watching.